Easing Prices Bypass India as RBI Lacks Tetangco Scope By Clarissa Batino and Max Estayo - Jul 15, 2012

Moderating inflation pressure across most of Asia offers central banks scope to cut interest rates further in coming months, with India an exception as consumer prices probably jumped at a faster pace last month.
The Asian Development Bank lowered its inflation forecast for the region last week and China reported the smallest price gains in more than two years. By contrast, India today will report wholesale prices rose at a faster pace in June from a year earlier, according to the median estimate in a Bloomberg News survey.
India’s accelerating inflation leaves its central bank constrained as counterparts across emerging economies take action. South Korea and China surprised markets with a reduction in interest rates this month and Governor Amando Tetangco said three days ago the Philippines has scope to ease monetary policy.
Emerging-market policy makers “have by far the greatest room to counteract economic weakness,” JPMorgan Chase & Co. analysts led by Jan Loeys, chief market strategist in New York, wrote in a July 13 note. They can “boost spending through monetary stimulus, fiscal stimulus, or simply by providing more clarity about their future actions,” they said.
Emerging-market policy rates remain a percentage point above emerging-market inflation and have plenty of room to come down in nominal terms, the analysts wrote.
The ADB reduced its inflation estimate for developing Asia to 4.4 percent this year from a 4.6 percent pace forecast in April. The Manila-based lender also cut its 2012 growth forecast for Asian economies excluding Japan to 6.6 percent from 6.9 percent, citing the impact of Europe’s debt crisis and slower expansion in China and India.

Moderating Inflation

Price gains are easing across most emerging markets, helped by a decline in food and commodity prices. Inflation in China, Asia’s biggest economy, slowed to 2.2 percent in June from a year earlier and producer prices dropped for a fourth month.
In India, a weaker rupee, government spending and rising food prices are contributing to inflation. The benchmark wholesale-price index probably rose 7.61 percent in June from a year earlier, according to the median estimate of 36 analysts, the second straight acceleration.
The fastest inflation among the biggest emerging markets prompted the Reserve Bank of India to unexpectedly leave interest rates unchanged on June 18 even after the economy expanded at the slowest pace since 2003.

Complex Politics

“We expect the growth risks eventually to dominate the RBI’s thinking and lead to greater monetary easing in the coming months,” Barclays Plc economists led by Singapore-based Nigel Chalk wrote in a July 13 note. “However, given the complex domestic politics, the timing of any policy loosening is difficult to predict, especially given the RBI’s recent hawkishness.”
The People’s Bank of China unexpectedly announced a reduction in benchmark lending and deposit rates on July 5, the second cut in a month, while the Bank of Korea lowered its benchmark repurchase rate last week for the first time in more than three years.
China’s economy grew at the slowest pace in three years in the second quarter, data released July 13 showed, and Premier Wen Jiabao said yesterday the government will intensify fine- tuning policies as the momentum for a recovery has yet to be established.

Policy Space

Bangko Sentral ng Pilipinas Governor Tetangco said more easing may be possible as inflation in the Philippines moderates.
“The stance of monetary policy remains appropriate but things can change -- a possible easing cannot be ruled out,” he said in an interview in Manila on July 13. “While we have sources of resilience, we also have policy space on the monetary and fiscal sides to do more if necessary.”
Price pressures have cooled even as the $225 billion economy expanded 6.4 percent in the first quarter from a year earlier, the fastest pace in Southeast Asia based on a basket of 17 Asia-Pacific economies tracked by Bloomberg. Consumer-price gains slowed to 2.8 percent last month from a year earlier.
“One is never out of danger on inflation, but at this point in time risks are on the downside,” Tetangco said. “The growth of the economy is not at the level that would lead to a breach of the inflation target.”
Inflation will be in the lower half of his 3 percent to 5 percent target, said Tetangco, adding his forecast applies to 2012 and 2013. Economic expansion in the second quarter probably remained healthy, he said, without providing an estimate. The data are due to be released next month.

‘More Dovish’

The central bank cut the rate it pays lenders for overnight deposits twice earlier this year, by a combined 0.5 percentage point to 4 percent, before leaving it unchanged in April and June. The next policy rate review is on July 26.
Central banks in emerging markets “have become more dovish over the past one or two months and we do expect some monetary loosening,” Sebastien Barbe, Paris-based head of emerging markets research and strategy at Credit Agricole CIB, wrote in a July 12 note. “They may refrain from lowering rates quickly in the short term, just in case the global economic momentum re- accelerates at the end of the year, making the global backdrop more prone to generate inflation pressure.”
To contact the reporters responsible for this story: Clarissa Batino at cbatino@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net;